Friday, July 11, 2008

Wall Street's Woes Will Impact Upstate NY

It's hard to sympathize with the Bankers and Analysts on Wall Street as their jobs and bonuses evaporate faster than the $80 you just put in your F-150, but the impact of lower profits and smaller salaries on Upstate will be real in the very near-term.

The numbers thus far are staggering - nearly 60,000 positions eliminated and perhaps over 100,000 by the end of the year (NY Times - 5/08). I think that might even be conservative. The average salary in Manhattan (this includes everyone - Wall Street, Ad execs, chefs, etc) was over $146k in 2006 pre-bonus and on Wall Street bonuses of 100-200% were not uncommon in recent years.

If we assume a conservative 40,000 positions eliminated in 2008 (with more likely in 2009) with an average total comp package of $200,000 - You could see a $600 million drop in state tax receipts just from positions eliminated. It takes a lot of jobs at Texas Roadhouse to make up that kind of tax revenue.

Recently the NYS Budget office put out the following outlook which highlights the problems facing NYS if Wall Street continues to struggle.

"New York State receives about 20 percent of its tax revenues from Wall Street in the form of taxes on bonuses, income, capital gains and large real estate transactions."

"Financial giants such as Morgan Stanley, Merrill Lynch, Bank of America, Citigroup, Lehman Brothers and others have reported disappointing earnings and are preparing for potential layoffs."

My real concern is with the tax collection in future years as Wall Street dramatically shifts it's bonus structure.

So when you read tonight another story about the struggles at Lehman Brothers or Fannie Mae or Freddie Mac, don't think we live in vacuum here in Upstate NY.

There is one very large domino (lower tax revenue) that could start a chain of events that will lead to lower spending, reduced services and possibly one higher taxes at the local level as state aid is reduced for schools.

Cheerfully yours,

Grindstone Financial

PS - Sorry for the long delay in posting. I've been very active in the markets lately and thought it best to avoid posting during this period.

Disclosure - I worked for Lehman Brothers in the late 90's and I am deeply upset by the recent turn of events there.

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